US Airline Industry: Competitive Environment and Economic Scenario

Discuss about the competitive scenario of the American airline industry.

The current business scenario is facing the huge intensity of competition in the market due to the presence of large number of players in the particular business sector. One of the most competitive business sectors in the current scenario is the airline industry. This industry especially in the American market is highly and intensely competitive in nature. Traditionally, American airline industry was the largest airline industry in the world with the presence number of legacy airliners. Moreover, with the entry of the budget carriers, the competition got further increased (Fabian et al. 2013). Thus, the airliners operating in the American market are in the need of effective and strategic policies in order to survive in the market and gain profits. Moreover, with the increase in the competition in the market, it is becoming more important for the airliners in the American market to determine the intensity of the competition in the market and initiate strategies accordingly.

In order to propose innovative and effective business strategies for the American airliners, it is important for them to identify the competitive scenario in the market along with determining the different aspects of the competitive scenario. This will help to understand the competition in the market and designing the strategies accordingly. This report will discuss the competitive environment of the US airline industry with the use of Porter five forces analysis. Moreover, the economical scenario of the industry will also be discussed in order to gain the economical insights of the industry. Recommended strategies will be discussed in accordance to that. 

United States is not having any national carrier owned by the government, rather all the airliners in America are of privately owned. United States is also having a large number of players in the market comprising of Delta Airlines, American Airlines as the legacy players and Southwest airlines and JetBlue are the budget carriers. In the recent time, large number of budget carriers have the entered the American market and increased the domestic competition to the large extent (David Mc 2013). According to the reports, American aviation industry currently stands at US$ 501 billion till 2016. Thus, the market for the airline industry is huge in the American market but the increase in the price war is leading to the reduction in the average profitability of the airliners.

Industry analysis via Porter five forces model

It is also reported that the entry of the budget carriers is further reducing the business potentiality for the legacy carriers as a major chunk of the customers are opting for budget carriers. Another major negative factor that is faced by the airliners in the American market is increase in the cost of jet fuel. Though this issue is facing by the global players but the impact on the American market is more due to the reason that increase in the fuel price is leading to increase in the fare, which cannot be done due to the increased competition in the market (Berghofer and Lucey 2014). Thus, the American airline industry is facing issues in relation to maintaining their profitability. The legacy carriers should have certain and effective strategies to overcome these challenges and increase the profitability.

Components of the competitive forces

The above five forces analysis is showing that threat of entry is lower in the American airline industry. This is due to the reason that huge capital investment is required for the new entrants in operating in the airline industry. Operating in the airline industry will require huge investment in maintaining infrastructure and assets. Thus, it will be difficult for the new entrants to have the access to this huge capital. Moreover, it will also be difficult for the new entrants to gain the economies of scale in the industry (Nayak Karopadi et al. 2014). Moreover, strict and extensive regulations associated with the airline operation will further refrain the new entrants to enter in this market. Thus, it can be concluded that the stringent regulations faced by the airliners cause huge cost to meet the standards (Choi, Lee and Olson 2015). In addition, airliners should have to maintain their hubs, aircrafts and other operational activities along with managing the customers and employees. Thus, cost of operation is more for the airliners, which is one of the major causes for lower profitability for this industry.

The above analysis is also showing that bargaining power of the buyers is more due to the presence more options in the market. Customers can choose from number of airliners in the market. In addition, emergence of the online ticketing mediums is also reducing the profitability of the airliners. This is due to the reason that customers can compare the fare of different airliners through the online portals and will select accordingly (Gurito and Siringoringo 2013). Thus, charging more fare is not possible for the airliners because this will reduce the potential target customers for them. This factor is also responsible for the lower range of profitability for the American airline industry. Bargaining power of the suppliers is also high for the American airline industry. This is mainly due to the reason that suppliers for the airliners include aircraft manufacturers and fuel suppliers. Both these suppliers are having higher influence in the airline industry. Cost of fuel is determined by the fuel producers and it influences the fare rate of the airliners (Ryerson and Hansen 2013). Thus, the profitability of the airline industry is determined majorly by the suppliers.

Factors affecting profitability of American airline industry

American airline industry is having number of substitutes in the forms of roadways and railways. Though, the percentage of the traffic of roadways and railways is comparable with that of the airways but in the recent time, the drastic improvement of the roadways and railways is attracting a good chunk of passengers. Thus, the more will be the number and development of alternate substitutes, the lower will be the profitability of the airline industry. With the development of the other transport modes, the traffic of airline industry is reducing and causing lower profitability for them (Yayla-Kullu and Tansitpong 2013). United States is having free market economy and thus there is higher probability of entrance of the global players in the American market. This will further increase the competition in the market and will reduce the profitability of the airliners in the American airline industry.

• One of the major advantages of using porter five forces is determining the competitive forces in the industry. Porter five forces identify the intensity of the competition in the particular industry and how much it is impacting the business potentiality of the organizations (E. Dobbs 2014). Thus, it helps the business organizations to initiate strategies in accordance to the identified factors.
• Porter five forces also help in identifying the influence of the suppliers and the buyers for the business organizations. Thus, it helps the business organizations to initiates strategies in order to regulate the influential power of the external stakeholders (Srivastava, Franklin and Martinette 2013).
• It also helps the new entrants in evaluating the competitive scenario to be faced by them in a particular business sector. Moreover, the new entrants can also identify the threats and challenges for them in entering in the particular market (McAuliffe 2015). Accordingly, they can initiate their business strategies.
• Porter five forces enable the business organizations in initiating their business strategies in terms of differentiation or cost leadership or market focus (Banker, Mashruwala and Tripathy 2014). This is due to the reason that porter five forces help the business organizations to identify the competitive rivalry and the threat of substitutes in the market. Thus, business organizations can have the understanding of what strategies should be initiated in order to cut off the intensity of substitutes.
• Porter five forces can be used for any industries and having without much data and information. Thus, it is more convenient to use in any given situation. Porter five forces also not having the requirement of experts and thus, it can be done by anyone. This convenience of the model is contributing in gaining popularity among the different business organizations.

• One of the major limitations of using the porter five forces is more concentration on the external factors. This model considers only the external factors rather than considering the diverse internal factors of the organizations. Thus, the analysis of the porter five forces cannot be applicable across all business sectors.
• This model analyzes by considering only the industrial elements. Thus, it is not possible to use it for the specific organizational purposes (Wijaya and Akbar 2013). This is due to the reason that specific organizational factors will be different and diverse and thus the industrial analysis of the porter five forces will have no use.
• Porter five forces analyze the specific industrial trends. However, in the current business scenario, there are number of business conglomerates that are having their presence in different sectors. Thus, porter five forces cannot be applicable for these organizations.
• Porter five forces consider the threat of substitutes in general. This means that all the close and distant substitutes are being considered for the analysis (Ciliberto and Williams 2014). However, in the real world situation, there are some sorts of differentiation between the products, which are not considered in the porter five forces analysis.

Economical performance of airline industry is cyclical in nature. This is due to the reason that revenue of the airline industry depends on the economic growth of the country. Travelling by air is still majorly considered as luxury and not the necessity. Moreover, it involves huge cost for the passengers in travelling by air. Thus, the impact of economy development is more for the airline industry. It is considered as cyclical due to the reason that the economic development of the country is also cyclical in nature (Aghion, Hemous and Kharroubi 2014). The more will be the economic development, the more will be the disposable income for the average customers to pay for the air travel and vice versa. Market for the airline industry will get increased with the development in the national economy and will reduce with the recession in the national economy.

This also can be considered as one of the major reasons for dwindling profitability of the American airline industry. This is due to the reason that the profitability of the entire airline industry is depending on the national economy of the country. In the recent time, United States is going through rough phase in terms of the economy. Rate of the unemployment is also increasing in the country. Thus, this is creating negative implications on the business performance of the American airline industry. They are also facing the issue in terms of profitability due to the adverse economical environment in the United States.

• It is recommended for any particular airline currently operating in the American airline industry to have their presence in both the higher end and budget passenger market. It is also recommended that airliner companies should have a sub brand to cater to different market segments. This will help the airliners to have persistent profitability in the market. This is due to the reason that incurring loss in the higher end airline market can be adjusted with the profits in the budget category and vice versa. The more will be the target market customers, the more will be the probability of generating revenue from the market.
• It is also recommended to the airliners that they should have their routes in as much locations as possible. In the current time, American airline industry is rapidly increasing in different routes especially in the smaller routes. Thus, the airliners should have their routes in these regions also. This will ensure that target passenger sector will be wide. However, in this case, it is to be noted that only the profitable routes should be chosen for operation. It is important for the airliners to identify the profitable routes only. Operating in the routes with having less passenger traffic will only cause loss for the airliners. On the other hand, operating only in the profitable routes will increase the ratio of profitability.
• Airliners should have both wide and narrow body aircrafts in their operation. This is due to the reason that narrow body aircrafts are suitable for shorter haul journey. Moreover, narrow body aircrafts are also more fuel efficient compared to the wide body aircrafts. Thus, operating these aircrafts in the shorter routes will fetch more profits for the airliners. This will also enable them to offer more competitive fares in the market due to the less cost of operation of the narrow body aircrafts. The customer share will thus get increased. On the other hand, they should operate wide body aircraft such as Airbus A380 for the longer haul route. This will help them to carry more passengers in the single go and thus the average cost of operation per customer will get reduced for the airliners. Strategically using both type of aircrafts will ensure that the airliners will have the option to optimally utilize the resources.
• American airliners should not only get depended on the market of the United States market. This is due to the reason that American market is going through rough phase and it is important for airliners operating in American airline industry to look for the foreign countries. Some countries especially the developing countries are having much more economy growth compared to America. Countries such as India and China are having more economic growth compared to the United States. Thus, it is recommended that airliners operating in the American market should enter the foreign markets also. This will ensure that market segment and market share will get increased. In addition, this will also help them to reduce the risk in operating only in the single market.

Conclusion

Thus, it can be concluded that American airline industry is one of the most competitive industries in the current business scenario. This is mainly due to the reason that huge number of players are operating in this sector in different price segments. This report discussed about the current competitive scenario of the American airline industry by using the Porter five forces analysis. It is identified that some of the major external factors such as buyers and suppliers are the major influential power in determining the profitability of the American airline industry. Moreover, it is also identified that huge competition in the market and increase in the budget carriers are the key reasons for the lower level of profitability for the American airline industry. This report also discussed about the cyclical economic performance of the American airline industry and it is concluded that their profitability is much depended on the growth of the national economy. In accordance to the identified factors, some of the recommendations are being discussed in this report. These recommended steps will help the airliners operating in the American airline industry to increase their ratio of profitability in their business operation. This report concludes that airliners in the American airline industry should look beyond the American market in order to enhance their profitability

References

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